Top 5 Stock Selection Strategies for Short Term Investments

Stock selection strategies decide a lot about your trades. When you are investing in the stock markets on a short term with an aim to earn returns better than other government schemes by investing in quality stocks, then there are a lot of factors that you need to keep in mind before finalizing the stock.

And choosing the factor which matters the most can help you decide your strategy. A stock market strategy is essentially your trading plan on the basis of which you invest your money in the markets. It can be based on fundamental research or technical research or news based events or any other such methodologies. Here we will discuss some of the common yet effective strategies which can help you choose the right stocks for short term investments in the stock markets.

5 Stock Selection Strategies for Short Term Investments

1. Moving Averages Based Strategy

2. On the Basis of Business Cycles

3. Following the Trend Strategy

4. Understanding Support and Resistance Levels

5. Candlestick Patterns to Track Reversal

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1. Moving Averages Based Strategy

A moving average is the average price of a stock over a fixed period of time. For example, moving average can be of 15, 20, 30, 50, 100, 150, 200 days. On the chart, the moving average is often a line which is sloping upward in a bullish market and sloping downward in a bearish market. Generally the moving averages of a longer duration are called slower moving averages, whereas the moving averages of a shorter duration are called faster moving averages. When these two lines intersect each other, they generate a signal for buying or selling, which can be used as a strategy for stock selection.

For example on the stock chart, if the 50 DMA line crosses the 200 DMA line from below, it would mean a time to ‘Buy’ the stock as there is more potential upside to the stock.

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2. On the Basis of Business Cycles

This is a more fundamental approach to stock selection for short term trading. Each company which specializes in a seasonal product sees a definite cycle in its business. For example in India, paint companies see an uptrend in the festive season – around Diwali as it is a time for cleaning and decorating houses, the weather is suitable for undertaking a painting work and also the wedding season follows the festive season.

Thus, paint companies see an upswing in their sales around October- November- December. This kind of analysis based on a company’s business cycle, its sales, profits etc. can be used as stock selection criteria for short term analysis.

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3. Following the Trend Strategy

Many stocks listed in the market are known to follow the trend of the stock market. These can also be used for short term investment when the markets seem poised for a bull run. This can be the time right after the markets have seen a downtrend and fundamentally, there has not been a major change in the markets. In such cases, choosing the stock which replicates the index can be a good strategy to earn profits.

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4. Understanding Support and Resistance Levels

This is also a technical strategy for choosing stocks, in which you understand and map the upper price and lower price band between which the stock prices usually oscillate. This can be useful for a very short duration holdings such as one week or two weeks. These two levels will form the ‘support’ and ‘resistance’ levels of the stocks and can be used to place trades for a short term.

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5. Candlestick Patterns to Track Reversal

This is also a technical analysis driven strategy for choosing stocks for short term trades. In this, you look for the reversal in the existing trend by tracking candlestick patterns. In simple terms, reversal means change in direction to the opposite. Since mostly stock markets have only two fixed directions upwards and downwards (other than sideways which is the absence of any direction), a reversal strategy identifies when a stock is about to change its direction from upward to downwards or downwards to upwards.

A candlestick is basically a chart formed using bar like shapes with lines on top and bottom called candles - containing information about the price movement of the stock.

A candlestick chart is used to demarcate the movements of the price of a security, derivative, currency or commodity. The candle formed in a candlestick chart contains the information of all four important levels on the duration of which the candle is formed- open, close, high, and low.

A fixed sequence of the candles can help in understanding when there will be a reversal in the price of the stock or security. There are many reversal patterns such as bullish morning star, Bullish hammer, shooting star, three- white soldiers, bullish harami etc. These patterns are indicators of reversal in the stock prices and can help you trade in the direction in which the reversal will happen.

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CONCLUSION:

Apart from choosing the right strategy for short term investment, you also need to choose the right instrument. Sometimes shares are the best instruments, while other times, futures and options can help you in your trading plan.

Another important thing to keep in mind while choosing trades is your risk appetite. You should never place trades beyond your risk capacity and should try to follow a trading hygiene, which essentially means following a stop loss and the basic rules of investments.

You can also take help of a SEBI registered investment advisor to invest for short term in the markets, who can guide you with the best and the most suitable options for you.

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